AC 3 – INTERMEDIATE ACCOUNTING 1

ACTIVITY #2

Instruction: Highlight the letter of the correct answer. Show solutions for the problems.

During 2021, Elway Corporation transferred inventory to Howell Corporation and agreed to repurchase the
merchandise early in 2022. Howell then used the inventory as collateral to borrow from Norwalk Bank,
remitting the proceeds to Elway. In 2022 when Elway repurchased the inventory, Howell used the proceeds
to repay its bank loan.

This transaction is known as a(n)

a. consignment.
b. installment sale.
c. assignment for the benefit of creditors.
d. product financing arrangement.

On whose books should the cost of the inventory appear at the December 31, 2021 balance sheet date?
a. Elway Corporation
b. Howell Corporation
c. Norwalk Bank
d. Howell Corporation, with Elway making appropriate note disclosure of the transaction

Eller Co. received merchandise on consignment. As of January 31, Eller included the goods in physical
inventory but did not record the transaction. The effect of this on its financial statements for January 31
would be
a. net income or profit, current assets, and retained earnings were overstated.
b. net income or profit was correct and current assets were understated.
c. net income or profit and current assets were overstated, and current liabilities were understated.
d. net income or profit, current assets, and retained earnings were understated.

Isla Co. purchased goods with invoice price of ₱5,000 on account on December 27, 20x1. The related shipping
costs amounted to ₱50. The seller shipped the goods on December 31, 20x1. Isla Co. received the goods on
January 2, 20x2 and settled the account on January 5, 20x2. How much is the net cash payment to the supplier
if the terms of the shipment are FOB destination, freight collect?
a. 4,950 net cash payment to supplier
b. 5,000 net cash payment to supplier
c. 4,950 net cash payment to buyer
d. 5,000 net cash payment to buyer

Solution:
Cost of purchase ₱5,000
Less: shipping cost ₱50
Net cash payment P4,950

A VAT-registered entity purchases inventory. The invoice price of the inventory includes payment for VAT.
The entity should

a. include the VAT paid as part of the cost of the inventory.

b. exclude the VAT paid and record it under the VAT payable account.
c. exclude the VAT paid and record it under the Input VAT account.
d. ignore the VAT payment and disclose it only in the notes to the financial statements.
 Where the fair value of the biological asset cannot be determined reliably on initial recognition, the biological
asset should be measured at
a. Cost.
b. Cost less accumulated depreciation.
c. Cost less accumulated depreciation and accumulated impairment losses.
d. Net realizable value.

December Co. has the following comparative information regarding its inventories.
20x2 20x1 20x2 20x1
Inventory, December 31 at cost 27,000 21,000       30,000       24,000
Inventory, December 31 at NRV       33,000       22,000
Cost of goods sold before     180,000     200,000
adjustments

December Co. recognizes write-downs of inventories in cost of goods sold.

How much is the cost of goods sold in 20x1?

a. 200,000
b. 202,000
c. 198,000
d. 220,000  

How much is the cost of goods sold in 20x2?

a. 178,000
b. 177,000
c. 182,000
d. 183,000 

Solutions:
20x2 20x1
Inventory, December 31 at cost 30,000 24,000

Inventory, December 31 at NRV 33,000 22,000

Write-down(write-up*) of inventory (3,000) 2,000

Cost of goods sold before adjustments 180,000 200,000

Write-down (write-up*) of inventory (2,000) 2,000
Adjusted cost of goods sold 178,000 202,000

On January 1, 20x1, October Co. signed a three year, noncancelable purchase contract that allows October Co.
to purchase up to 15,000 units of face shields annually from November Co. at ₱15 per unit. The guaranteed
minimum annual purchase is 3,000 units. At year-end, it was found out that the goods are obsolete. October
Co. had 4,000 units of this inventory on December 31, 20x1, and believes these parts can be sold as scrap for
₱5 per unit. How much is the loss on purchase commitment to be recognized on December 31, 20x1?

a. 70,000
 b. 100,000
c. 60,000
d. 0
Solution:

Guaranteed minimum annual purchases 3,000

Multiply by: Remaining yrs. in the contract (2022 & 2023) 2
Total goods to be accepted in the future 6,000
Multiply by: Purchase price per unit less salvage value (15 - 5) 10
Loss on purchase commitment 60,000

Presented below is information pertaining to Lizzie Co.:

Cost Retail
Inventory, January 1 21,750 35,000
Purchases 138,250 200,750
Freight-In 5,000 -
Purchase discounts 1,250 -
Purchase returns 13,000 21,500
Departmental Transfers-In (Debit)                                                2,500 3,750
Departmental Transfers-Out
2,000 3,000
(Credit)                                                                                                 
Markups                                                                                                   15,000
Markup cancellations                                                                                 5,000
Markdowns                                                                                                30,000
Markdown cancellations                                                                            7,500
Abnormal spoilage (theft and casualty loss) 12,500 17,500
Sales                                                                                                      109,500
Sales returns 6,250
Sales discounts                                                                                         2,500
Employee discounts                                                                   1,250
Normal spoilage (shrinkage and breakages)                                                                           500

Cost Retail
Inventory, January 1 21,750 35,000

Purchases 138,250 200,750

Freight-in 5,000 -
Purchase discounts (1,250) -
Purchase returns (13,000) (21,500)

Net purchases 129,000 179,250

Departmental transfers-in (debit) 2,500 3,750

Departmental transfers-out (credit) (2,000) (3,000)
Net markups (15,000 – 5,000) 10,000
Net markdowns (30,000 – 7,500) (22,500)
Abnormal spoilage (theft and casualty loss) (12,500 ) ( 17,500)
Total goods available for sale 138,750 185,000

Sales 109,500
Sales returns (6,250)
Employee discounts 1,250
Normal spoilage 500

Net sales ( 105,000)

Ending inventory at retail 80,000

How much is the ending inventory under the Average cost method?
a. 60,750
b. 60,000
c. 53,600
d. 62,400

Solution:
Average cost ratio = (138,750 ÷ 185,000) = 75%

Ending inventory at retail (or at selling price) 80,000

Multiply by: Average cost ratio 75%
Ending inventory at cost 60,000

How much is the ending inventory using the FIFO cost method?
a. 60,750
b. 60,000
c. 53,600
d. 62,400

Solution:
FIFO cost ratio = [(138,750 – 21,750) ÷ (185,000 – 35,000)] = 78%

Ending inventory at retail 80,000

Multiply by: FIFO cost ratio 78%
Ending inventory at cost 62,400

How much is the ending inventory under the Conservative cost method?
a. 60,750
b. 60,000
c. 53,600
d. 62,400

Solution:
Average cost ratio = (138,750 ÷ (185,000+22,500) = 67%
Cost = 80,000 x 0.67 = 53,600

Jaylie Co. is a wholesaler of stainless-steel tumblers. The activity for product “Tumbler X” during August is
shown below:

Date Transaction Units Unit cost Total cost

1-Aug Inventory   2,000  ₱    28.80  ₱  57,600 
7 Purchase   3,000        29.76    89,280
 
12 Sales
4,200   
13 Purchase   4,800        30.40      145,920 
14 Sales return    
 600 
 
22 Sales
3,800   
29 Purchase   1,900        30.88        58,672 
   
30 Purchase return       30.88 
300      (9,264)
Total goods available for
sale     ₱ 342,208 

Solution:
Beginning inventory in units 2,000
Net purchases in units (3,000 + 4,800 + 1,900 – 300) 9,400
Total goods available for sale in units 11,400

Total goods available for sale in units 11,400

Quantity of goods sold (4,200 – 600 + 3,800) (7,400.)
Ending inventory in units 4,000

Units Unit cost Total cost

Ending inventory to be allocated 4,000

Allocated as follows: From Aug. 29

net purchases (1,900 - 300) (1,600.00) 30.88 49,408

Bal. to be allocated to the next most

recent purchase date 2,400

From Aug. 13 purchase (2,400) 30.40 72,960

Ending inventory at cost 122,368

Total goods available for sale in pesos 342,208

Ending inventory at cost (122,368.00)
Cost of goods sold 219,840.00

How much are the ending inventory and cost of goods sold under the FIFO – periodic cost flow formula?

a. Ending inventory - 219,840; Cost of goods sold - 122,368

b. Ending inventory - 112,341; Cost of goods sold - 229,867
c. Ending inventory - 122,368; Cost of goods sold - 219,840
d. Ending inventory - 122,386; Cost of goods sold - 219,804

How much are the ending inventory and cost of goods sold under the FIFO – perpetual cost flow
formula?

a. Ending inventory - 219,840; Cost of goods sold - 122,368

b. Ending inventory - 112,341; Cost of goods sold - 229,867
c. Ending inventory - 122,368; Cost of goods sold - 219,840
d. Ending inventory - 121,794; Cost of goods sold - 220,414
 How much are the ending inventory and cost of goods sold under the weighted average – periodic cost
flow formula?

a. Ending inventory - 219,840; Cost of goods sold - 122,368

b. Ending inventory - 112,341; Cost of goods sold - 229,867
c. Ending inventory - 120,080; Cost of goods sold - 222,128
d. Ending inventory - 121,794; Cost of goods sold - 220,414

Solution:

Ending inventory 4,000 units

Multiply: 30.02
120,080

COGS 342,208
(120,080)
222,128

How much are the ending inventory and cost of goods sold under the weighted average – perpetual cost
flow formula?

a. Ending inventory - 219,840; Cost of goods sold - 122,368

b. Ending inventory - 112,341; Cost of goods sold - 229,867
c. Ending inventory - 122,368; Cost of goods sold - 219,840
d. Ending inventory - 121,794; Cost of goods sold - 220,414

Date transactions units unit cost total cost

Aug 1.00 Inventory 2,000 28.80 57,600

7.00 purchase 3,000 29.76 89, 280

moving average unit cost (146, 880/500) 5,000 29.38 146,880

12.00 sales (4,200) 29.38 (123,396.)
Sale return 6 00.00 29.38 17,628
13.00 purchase 4,800 30.40 145,920

moving average unit cost (187,03 2/6,200) 6, 200 30.17 187,032

22.00 Sales ( 3,800 ) 30.17 (114,646)
29.00 Purchase 1,900 30.88 58,672
30.00 Purchase Return (300) 30.88 (9,264)
Ending inventory in units and at costs 4,000 121,794

Aug. 12 Sales 123,396.00

Less: Aug. 12, Sales return (17,628.00)

Add: Aug. 22, sales 114,646.00

COGS 220,414.00

The following information pertains to Indiana Jones Co.

Sheep 500,000 Wool 6,000
Rubber products 10,000 Thread 3,000
Trees in a timber plantation 95,000 Felled trees 8,000
Maize plants 40,000 Clothing 150,000
Lumber 62,000 Milk 9,000
Pigs 200,000 Carcass 7,000
Roasted peanuts 20,000 Sugar 67,000
Cotton plants 10,000 Harvested cotton 13,000
Peanut plants 5,000 Harvested peanuts 140,000
Sugarcane 25,000 Harvested cane 22,000
Tobacco plants 45,000 Picked leaves 3,000
Tea bushes  800,000 Oil palms  300,000
Dairy cattle 1,000,000 Picked grapes 2,000
Fruit trees  600,000 Picked fruit 10,000
Tea 43,000 Grape vines  2,000,000
Rubber trees  300,000 Harvested latex 10,000
Yarn 22,000 Cured tobacco 320,000
Carpet 33,000 Wine 500,000
Logs 45,000 Processed fruit 20,000
Wheat plants 60,000 Palm oil 50,000
Cheese 75,000 Bean plants 20,000
Sausages 88,000 Cured hams 92,000

How much is classified as biological assets that are accounted for under PAS 41 Agriculture?
a. 2,660,000 b. 2,000,000 c. 6,000,000 d. 2,250,000

Solution:
Sheep 500,000
Wheat plants 60,000
Trees in a timber plantation 95,000
Maize plants 40,000
Dairy cattle 1,000,000
Pigs 200,000
Bean plants 20,000
Cotton plants 10,000
Peanut plants 5,000
Sugarcane 25,000
Tobacco plants 45,000
Total biological assets 2,000,000

How much is classified as property, plant and equipment that are accounted for under PAS 16 Property, Plant
and Equipment?
a. 4,000,000 b. 4,860,000 c. 4,560,000 d. 3,650,000

Solution:
Tea bushes 800,000
Grape vines 2,000,000
Fruit trees 600,000
Oil palms 300,000
Rubber trees 300,000
Total PPE 4,000,000

How much is classified as agricultural produce?

a. 149,000 b. 248,000 c. 290,000 d. 230,000

Solution:

Wool 6,000
Felled trees 8,000
Milk 9,000
Carcass 7,000
Harvested cotton 13,000
Harvested peanuts 140,000
Harvested cane 22,000
Picked leaves 3,000
Picked grapes 2,000
Picked fruit 10,000
Harvested latex 10,000
Total agricultural produce 230,000

How much is classified as inventory?

a. 1,480,000 b. 1,600,000 c. 1,540,000 d. 1,880,000

Solution:
Roasted peanuts 20,000
Yarn 22,000
Carpet 33,000
Logs 45,000
Lumber 62,000
Cheese 75,000
Sausages 88,000
Cured hams 92,000
Thread 3,000
Clothing 150,000
Sugar 67,000
Cured tobacco 320,000
Tea 43,000
Wine 500,000
Processed fruit 20,000
Palm oil 50,000
Rubber products 10,000
Total inventory 1,600,000